Limiting Base Erosion

S. 2081. Introduction

Controlled foreign companies (CFC) legislation allow countries to safeguard their taxable base, by charging taxes on income or profits arising in a foreign entity that is controlled by a resident taxpayer in their jurisdiction.

Therefore, the importance of the control definition in CFC legislation is the first step in determining the applicability of such rules.

Only where it is concluded, by way of application of mechanical tests or more in‑depth analysis of all the facts and circumstances in place, that control exists can CFC rules start to be applicable.

BEPS Action 3, part of the OECD Base Erosion and Profit Shifting (BEPS) Final Report, provides non-mandatory recommendations divided in several building blocks. The intention is for countries that do not have CFC rules to be able to identify the key elements that make effective rules, at the same time that for the countries that already have CFC rules can align their rules with the recommendations.

2. Definition of Control and the OECD’s Action Plan on Base Erosion and Profit Shifting – BEPS

2.1. BEPS CFC Control Definition

The demand for a fair allocation of profits to where the economic activities of companies are bei...